Four times a year, our Multi-Asset Solutions team holds a two-day-long Strategy Summit where senior portfolio managers and strategists discuss the economic and market outlook. After spirited debate and a rigorous examination of a wide range of quantitative and qualitative measures, the team establishes key themes and determines its current views on asset allocation. Those views will be reflected across multi-asset portfolios managed by the team.

From our most recent summit, held in mid-November, here are key themes and their macro and asset class implications:

Asset allocation views

Historians will debate exactly when the outlook shifted from “lower for longer” to reflation. But for now, at least, 2016 looks set to be a watershed year—politically, socially and economically. The Brexit vote in June and the election of Donald Trump in November may have marked a trend toward populism. But the contrasting reaction of bond markets to each event hints at a profound shift in the underlying economic environment—from monetary to fiscal primacy.

Recent history is littered with examples of populism ultimately ending in unfavorable economic outcomes, but in its early stages populism’s promise of even a meager fiscal boost may unleash animal spirits and bring forward consumption. To be clear, pro-cyclical fiscal stimulus is uncharted territory, but thus far the reaction of the S&P 500 and the Russell 2000—up 3% and 11%, respectively, since the U.S. election—suggests markets are prepared to give it the benefit of the doubt. Only time will tell whether fiscal policy can unleash the American economy’s inner tiger or will merely grab an inflationary Tigger by the tail.

The reality may well not live up to the hyperbole. While we expect a modest fiscal boost, it is unlikely to exceed 0.5% of GDP and will be back-loaded to the second half of 2017 at best, translating to slightly above-trend growth, on average, in 2017. The better news is that global growth in general was already settling into a pattern of near-trend growth for 2017. On balance, this leaves us with a modest growth backdrop and limited recession risk but with a clearly more reflationary picture than we’ve had for some years.

The U.S. economy continues to progress through a mid-cycle phase, but the emergence of fiscal stimulus as an accepted policy tool may yet hasten the economy’s move toward late-cycle as 2017 progresses. The cycle may eventually conclude with a burst of exuberance and excess valuation, but we believe that this will not be a concern for next year. Nevertheless, as we shift from a “lower for longer” world toward a more reflationary regime, we expect later-cycle plays to come into vogue across many asset markets.

Investment implications

Our asset allocation for early 2017 reflects that, while the lows in bond yields are likely behind us, we remain in a world of easy policy and somewhat fragile growth. We maintain a small overweight (OW) to equities but with greater conviction than we had in September. By contrast, we take an underweight (UW) view on duration for the first time since 2014, acknowledging that the range for U.S. yields has risen and that while the anchoring influence from low yields in Europe and Japan persists, it has weakened significantly.

We expect U.S. policy to remain accommodative at the margin but now see the Federal Reserve (Fed) “dots” as the central path for rates rather than the upper bound. As such, we expect the U.S. dollar to resume its appreciation, albeit at a steadier pace than before. This should provide some relief to emerging market (EM) assets, which face headwinds from protectionist rhetoric and a rising dollar but have some support from higher commodity prices and improving data. On balance, we take a neutral aggregate view on EM assets, with a small OW to EM equity and an UW to EM debt.

We maintain a preference for credit over government bonds but in absolute terms trim our credit OW to a more modest level, as scope for further spread compression looks limited. We also keep our OW to real estate, with a preference for direct exposure rather than REITs given the greater valuation cushion against higher rates.

In aggregate, our portfolio is designed for a world of roughly trend growth with some upside risks to both growth and inflation. The biggest threats would be a sharp rise in stock-bond correlation or rapid appreciation of the U.S. dollar. Hints that reflationary attempts are resulting merely in inflation and not growth could spur such outcomes, but for the time being we are reassured by the underlying momentum of the economy and take a commensurately more pro-risk tone in our portfolios.

Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results.

J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

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Four times a year, our Multi-Asset Solutions team holds a two-day-long Strategy Summit where senior portfolio managers and strategists discuss the economic and market outlook.

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